Category Archives: Japan’s demise

Yet again Japan’s performance confirms that QE is mere short-term bubble making

Japan has reported another quarter of sputtering economic performance.  Notwithstanding the small rebound reported for Q4 based on highly implausible export deflators, real GDP is barely higher than it was in December 2012 before Abenomics launched its truly crazy money printing spree—–a wave of QE so massive that it is actually draining the Japanese government bond market of any and all securities available for sale.

And yet, the Abe government and Kubota, its shaman at the BOJ, do not hesitate to threaten even more financial insanity—even as the obvious failure of current policies is over and over again reported month after month. What was is Einstein said about insanity?

japan-gdp-constant-prices

Abe’s shaman on the ropes

We wrote on Sept 9, 2014 how Japan’s post-war miracle was an aggressive mercantilist policy which depended on protection and exchange rate manipulation [see http://different-traditions.com/?p=1899]. That the US could put an end to that with the Plaza Accords of 1985 was due to Japan’s status as a conquered nation, something which was made very clear by recent events, when the reformist government of Yukio Hatoyama was scuttled by the US in 2010 [See report on Karel Van Wolferen’s spectacular article on the subject by opening link http://different-traditions.com/?p=1944=2076].

Where China has pursued a similar policy, the US administration has constantly tried to force a revaluation of the Renmimbi. However, the US has been unsuccessful in such efforts. China, unlike Japan, was not a conquered nation, and thus follows its own agenda.

Japan has not reformed since 1985, draining the savings of its people to sustain and unsustainable economic structure, deficit funding a system that is addicted to corporate and social welfare, subsidies, and bailouts that no one ever wants to pay for.

All this represents the background to the accession of Haruhiko Kuroda as Governor of the Bank of Japan, and as “Abe’s shaman”, as we have previously called him, pace Izuru Kato, pursuing US Fed inspired ZIRP and market manipulation to keep mushrooming Japanese debt yields in low single-digits. Kuroda’s helter-skelter QE programme was supposed to boost growth, by boosting inflation. On November 2, 2014 we wrote about Izuru Kato’s commentary that this appeal directly to inflationary psychology to boost consumption expenditure, would fail [See http://different-traditions.com/?p=2043].

As indeed it has. Admittedly declining oil prices haven’t helped. But surely this and Kuroda’s QE programmes hammering the Yen should have helped exports?

Not even crushing the Yen has helped to boost exports, however. The Japanese trade balance is firmly in the red. Seeking growth in a moribund world market of competitive devaluation, where your technology has started to lag behind anyway, isn’t easy.

ABOOK-Jan-2015-Japan-Trade-Balance

 

 

 

Japan as the weakest link in the international monetary order and the Abenomic roller-coaster to oblivion

Moody’s has downgraded Japan’s credit rating to A1 – five down from the top. The last time Moody’s had downgraded Japan was in August, 2011, when JGBs (Japanese Government Bonds) yielded 1.02%, and at the time the market seemed unbelievably to take this in its stride. Since then, every metric of the country’s fiscal health has sharply deteriorated, leading to an ever larger mountain of government debt. Nevertheless, the government’s cost of borrowing has dropped to near zero.

The recent downgrade is due according to Moody’s to  the “ uncertainty over the achievability of fiscal deficit reduction goals,” along with the bad performance of the real economy, which raises doubts about the “timing and effectiveness of growth enhancing policy measures.” Presumably, when sovereign bonds get downgraded, their value should actually fall and yields rise as investors begin to see the additional risk.

And yet the opposite has happened, and JGBs rose and yields fell (with10-year yields at 0.43% today, and the five-year yields at 0.08%), allowing the Japanese government essentially to borrow for free. If inflation is taken into account – 2.9% overall and 4% on goods – it is making money by borrowing at such low cost. But the question is why market participants accept such a guaranteed loss after inflation on what are very risky bonds?

Japan has always essentially been a “managed” and protected marketplace. Although it opened up somewhat over the last two decades, it remains hermetically sealed off to imports of various kinds (esp. cars) to protect Japanese companies, farmers, etc… from competition. But the Japan also depends on funding in the cheapest way possible for as long as possible a system that is addicted to corporate and social welfare, subsidies, and bailouts that no one ever wants to pay for.

In such a scenario, normally, market investors would want to be paid double-digit junk-bond yields to take on such risks and fund such a system, with the strong ongoing possibility of debt crises and default. Proper (free-market) funding costs would have driven Japan long ago to mend its ways, otherwise it would have fallen into a debt crisis, and financial collapse.

It has become a world-wide feature now, that the debt of over-indebted governments cannot be left to the free markets, and that yields must be manipulated down by any and all means. Central banks impose ZIRP (zero-interest-rate policy)  combined with outright market manipulation, such as purchases of government debt and other assets, and constant media propaganda. Japan is the most extreme example of this.

Since early 2013, the BoJ (Bank of Japan) has been telling Japanese banks to sell their JGBs, and  the Government Pension Investment Fund (GPIF) to slash its vast holdings, and this is what has happened. But far from these events triggering a massive crash, and an extraordinary rise in yields, we see the result has been different. The reason for this is that the BoJ promised to buy it all under the pretext of inflation stimulation (despite the fact that there is already substantial inflation in the Japanese economy). The BoJ’s relentless buying is what has driven yields to near zero, increasingly so now for the longer-dated maturities as well. In this process, the BoJ has throttled the government bond market to death.

Takeshi Fujimaki, an opposition lawmaker, recently said that:

The BoJ used consumer prices as an excuse to add stimulus and continues to hide that it’s monetizing government debt. But the truth is that Japan will default unless the BoJ continues to buy JGBs even after inflation accelerates beyond its intended target.

To read this in full open link: http://www.bloomberg.com/news/2014-12-02/yen-seen-at-200-by-fujimaki-as-lawmaker-doubts-abe-japan-credit.html

So to monetize ever larger portions of government debt, the BoJ is supplying newly printed yen into a market that it can manipulate but cannot control, i.e. the global currency market, with the obvious risk of the yen spiralling down uncontrollably. Abenomics has already send the yen from ¥75 to  $1 in 2012, to ¥120, destroying  37% of Japan’s yen-denominated wealth in the process.

If the BoJ decides that the yen has fallen enough, it might not be able to stop its fall. It would have to sell its international reserves and buy yen – the opposite of QE. If it decided to buy yen, instead of printing yen, to prop up the currency, it would thereby surrender control over the government bond market. At near-zero yields there would be no buyers for the relentless supply of new JGBs , and chaos would break out instantly. The BoJ would be forced back into its buying programme and relentless QE. So on that basis, Fujimaki sees ¥200 to the dollar.

This would eradicate much of the wealth of Japanese society, causing hardship and misery, although potential chaos might be stemmed. But destroying the purchasing power of the yen and the wealth of the Japanese people will destroy Japan’s economy.

Kuroda, Abe’s shaman taking Japan helter-skelter into oblivion

I have been writing consistently about the fact that in the QE world, the combined monetary policy of the Western Central Banks is crushing the real economy.

Nowhere, I have argued, is this felt more than in Japan where the ageing and diminishing population is becoming more and more introverted, incapable of comprehending their alienation from the system as it has been run for the past 25 years.

Japan’s elites are staring rigidly into the oncoming headlights of economic and societal collapse.

Here is more news about the exponentially growing madness at the BoJ

Leika Kihara writes on Reuters Oct 22 (http://www.reuters.com/article/2014/10/21/japan-economy-boj-idUSL3N0SG7IO20141021)

Izuru Kato is a soft-spoken and bookish economist, but his dismissal of the Bank of Japan’s stimulus policy as “monetary shamanism” is ringing loud in the ears of bank Governor Haruhiko Kuroda.

Kuroda’s policy of quantitative and qualitative easing (QQE) increases the money the bank supplies to the financial system by buying high-quality assets. It is aimed at lowering real interest rates, pushing up inflation and stimulating private demand to revive an economy that has stagnated for two decades.

Kato says it relies too much on psychology, and academics and former policymakers are increasingly agreeing with him.

His weekly research notes – with witty insights stretching from monetary policy to how the poor lime crop in Mexico is inflating margarita prices – have become a must-read for investors and central bankers.

Years of experience as a money market broker at the receiving end of the BOJ’s market operations has made Kato, now economist and president of the Totan Research think-tank, a dab hand at interpreting the messages of BOJ policymakers.

He remembers, and was critical of, the bank’s previous failed effort in quantitative easing (QE) in the five years to 2006.

The 49-year-old took an even dimmer view of QQE, though few were listening as sentiment picked up and Tokyo shares rose.

Now, as markets lose faith that QQE will achieve the BOJ’s central policy plank that inflation will rise to 2 percent from early next year, he has the ear of many more.

The policy is flawed, he argues, because it fails to explain why inflation should rise when economic growth is subdued, and relies instead on people’s belief that the stimulus will cause prices to rise enough to encourage them to spend now.

“While other central bank governors use similar tactics, Kuroda is among the most extreme ‘shaman’ of them all,” Kato said in a recent interview. “But there are limits to how long you can keep affecting expectations. The transmission channel of QQE just isn’t clear.”

NO WAY OUT

Advocates of QQE say Kuroda’s massive stimulus is reducing already low interest yields, which should lower expectations of future real borrowing costs and lift inflation expectations.

But Kato’s criticisms are resonating with those BOJ policymakers who always had some reservations about QQE.

“He’s spot on about a lot of things,” said one central banker and a friend of Kato. “He’s very knowledgeable about the technicalities of monetary policy, perhaps more than even some of us at the BOJ.”

A majority on the board has already expressed doubts on the feasibility of setting a two-year timeframe for hitting the inflation goal or on the BOJ’s optimistic economic outlook.

What sets Kato apart from many QQE sceptics is his warnings on the dangers even if Kuroda hits the inflation target.

Three years into the introduction of QQE last April, consumer prices could rise more than 9 percent, which households would find hard to manage with wage growth still slow, he argues.

And higher inflation would push up long-term interest rates and raise the cost of financing Japan’s huge public debt, he says, putting at risk premier Shinzo Abe’s efforts to lift the economy out of stagnation.

Moreover, the BOJ’s bloated balance sheet will exceed the size of Japan’s economy in 2018 if the current pace of asset buying continues, which will make an exit from QQE extremely difficult, potentially triggering a bond market sell-off, he says in his recent book, titled “No way out for the BOJ”.

“What’s worrying is that the current BOJ board does not seem to have the readiness to be well prepared for when they have to exit QQE,” he said in the book.

In such circumstances, says Miyako Suda, an academic who served as a BOJ board member for a decade until 2011, the central bank might need to call on Kato’s services.

“When you think about the time the BOJ were to end QQE, it would be nice to have someone well versed in market functions like him.”

 

The fall of Hatoyama and why Japan eventually caught Abemania

…. let this sink in: Washington managed, without the use of violence, to manipulate the Japanese political system into discarding a reformist cabinet. The party that had intended to begin clearing up dysfunctional political habits that had evolved over half a century of one-party rule lost its balance and bearings, and never recovered. Hatoyama’s successor, Kan Naoto, did not want the same thing happening to him, and distantiated himself from the foreign policy reformists, and his successor in turn, Yoshihiko Noda, helped realign Japan’s bureaucracy precisely to that of the United States where roughly it had been for half a century. By calling for an unnecessary election, which everyone knew the DPJ would lose, he brought the American-blessed LDP back to power to have Japan slide back into its normal client state condition..

Read Karel Van Wolferen’s spectacular piece by opening link

http://www.unz.com/article/the-american-world-empire-japan-as-a-vassal-state/

 

 

Japan at the centre of the unfolding financial crash

Japan came out of a nuclear attack in WWII to become a massive economy, the third largest economy after the US and China, almost twice as large as Germany, and more than twice as large as either France or the UK. But since 1991 Japan has been in recession – called now the “lost twenty years” (失われた20年, Ushinawareta Nijūnen), where GDP and price levels have fallen and where the real wage has dropped. There has been a net population loss due to falling birth rates and almost no net immigration (despite one of the highest life expectancies in the world (81.25 years): so the country is growing old.

The lack of direction and vision in Japanese society is almost frightening: a cultural malaise has seized the nation almost like a nasty viral infection. Young people in Japan are, it seems, no longer in having sex: it is too “Mendokusai”  which translates as “too troublesome” or “I can’t be bothered”, where romantic commitment represents burden and drudgery. This is related to the economic condition of the country in the sense of reflecting an attitude to the exorbitant costs of buying property in Japan and to the uncertain expectations from a potential spouse and the in-laws that come with the spouse. According to the Japanese population institute, women in their early 20s today have a one-in-four chance of never marrying and their chances of remaining childless are even higher at almost 40%. What is shocking about all this is that no-one is concerned. A detailed analysis of this malaise is to be found on:

http://www.theguardian.com/world/2013/oct/20/young-people-japan-stopped-having-sex

Add to this depressing picture the results of the Fukushima catastrophe, a cataclysm caused not so much by the natural disaster that triggered it, but by the incredibly bad planning that led the Japanese bureaucracy to build nuclear power stations on earthquake fault lines, and by the now surprising lack of technical prowess, previously strongly associated with Japanese industry, which became clear in the blind trust the Japanese seemed to have in US General Electric designs and their inability either to understand these designs for themselves or to incorporate their own safety or back-up mechanisms into the construction and development. The unravelling cover-up since the initial disaster is only partly a political damage limitation exercise, and mostly sheer lack of an engineering grasp of nuclear power.

Estimates of the total economic loss from this range from $250-$500 billion. See:

http://www.energymatters.com.au/index.php?main_page=news_article&article_id=1919

and

http://www.psr.org/environment-and-health/environmental-health-policy-institute/responses/costs-and-consequences-of-fukushima.html

The Fukushima disaster represents the largest discharge of radioactive material into the ocean in history, which for a country so dependent on fishing is a catastrophe of unprecedented proportions. See:

http://www.irsn.fr/FR/Actualites_presse/Actualites/Documents/IRSN-NI-Impact_accident_Fukushima_sur_milieu_marin_26102011.pdf

All this has lead to the panicky politics of Shinzō Abe which involves a new militarism expressing the country’s malaise and its social and political bankruptcy, as well as quantitative easing on an almost cosmic scale to try and restart a totally moribund economy.

The problem in Japan has always been the lack of flexibility of its society: in fact the whole Fukushima disaster is down to the “untouchable” élitist status of the Nuclear industry represented by TEPCO – the Fukushima operator and holding company for all of Japan’s nuclear power plants. Their ‘untouchability” has in fact led to innumerable cover-ups over the course of the recent disaster, which leaves no doubt that things must be much worse than has been reported, and costs probably much higher than even the worse estimates we have.

So a major part of the Western economic system has terminally failed is being propped up by the rest of the system, while beginning to drag it down. How did we get here? How have we come to have such a disastrous economic situation which seems to have impacted society to the extent of even negatively affecting the younger generation’s normal drives and values.

From the government led 30-year drive to rebuild the Japanese economy from the complete devastation of WWII until 1980, the country public debt had reached only 50% of GDP by the end of that period.  By contrast, today’s public debt in Japan is 250% of GDP, a figure “off-the-charts” relative to all other large developed economies, unparalleled in history, and generated by massive deficit spending, followed by its modern cousin, quantitative easing.

These outcomes have to be viewed from the perspective that Japan’s post-war miracle was never the miracle it was claimed to be at all: in fact the Japanese economy rebounded from the ashes of WWII for three decades due only to massive public and private investment, depending on high household savings, and a rigid mercantilist industrial development and export promotion policy, depending on blatantly protectionist policies that kept imports out and the yen’s exchange rate far below its true economic value.

As David Stockman explains on:

http://wolfstreet.com/2014/08/17/japans-fiscal-demise-a-cautionary-tale-for-our-times/

Neither of these aspects was sustainable, leading to a capital goods and export sectors which were enormously over-built, and the double-digit growth in fixed asset investment which had powered Japan’s post-war GDP growth was inevitably destined for a sharp fall. A counter-protectionist reaction in Washington would bring this to an end, such that the drastically undervalued yen creating the country’s export surpluses was going to be reversed. When we think that the US has had exactly the same problem with China from the mid-1990s until now, and that the US administration has tried to force a revaluation of the Renmimbi (the “people’s currency”) of which the Yuan is the basic unit, and failed, we have to remember that Japan, unlike China, was conquered nation. Its bureaucratic élite, that same élite which swore by General Electric nuclear power technology and had made it an “untouchable” sacred cow of the Japanese system, that élite which was usually Ivy League-educated, made Japan – although in geographical terms as “Far-Eastern” as China was – an integral part of the “Western” economic system.

It was James Baker who led the Washington backlash and structured the Plaza Accords of September 1985 which Japan ended up signing. This led to buying programme for the Yen which drove Japan’s exchange rate from about 260 per dollar to 130 over the next few years. But this was not accompanied by any reform to the economy.

Instead, the Bank of Japan began to fund a deficit spending programme in response to these changes by slashing interest rates in early 1986, and this despite the fact that the economy had excess capacity in the capital goods sector, across all of steel, auto manufacturers, machinery, consumer electronics and so-on, as a result of the post-war boom. What Japan had actually needed at the time was higher rather than lower interest rates, in order to alter this chronic over-investment in export capacity.

All the easy money thus produced had to flow somewhere and it flowed into the financial sector, creating a massive bubble in real estate and corporate stocks and bonds. This “financialisation” of the economy led to businesses drastically expanding borrowing in the form of both straight and convertible debt, all of which went into speculation in real estate and financial assets – especially into the stock of other companies within the Keiretsu groups around which Japan’s state-led development model had been organized, artificially driving up stock prices.

The Nikkei index of the Japanese stock market rose fourfold during the 50 months after the Plaza Accord, while the price of land rose to insane levels, rising fivefold before the major crash of 1991 (at which point point the aggregate value of Tokyo real estate exceeded that of the US as a whole). Meanwhile there was a drop in the growth capacity of the real economy due to the now more realistic exchange rate and the end of the fixed-investment boom. The excess capacity of the export economy was faced with fierce competition now in foreign markets, and the bureaucratic élite, together with the ruling LDP political party, now sought through these new policies described above to “featherbed” their corporate constituencies: but this wasn’t just easy-money, there was also a thoroughgoing rigging of the domestic markets and outright protectionism. Construction deals, new credit, and corruption spread among these constituencies, leading to overbuilding and white elephant projects.

So in the two decades after 1990, Japan’s government expenditures rose by 45%, while its general revenues fell by 15-20% opening up a massive fiscal deficit that fueled the parabolic rise of debt as we saw above, leading to credit saturation which itself has led to low or negative growth ever since. Furthermore, bad economic advice from abroad led the Ivy League-educated Japanese élites to dismantle the government tax base in order to try and generate supply-side effects, with even worse results – leading to a drop in government nominal revenues over two decades, in amounts unparalleled in history.

The lethal combination of easy money and lax fiscal policy has now also been at the core of
Shinzō Abe’s “Abenomics”, encouraged by ex-US Federal Reserve Chairman Ben Bernanke who pushed the myth that Japan was experiencing “deflation” (rather than structural overcapacity) and who recommend on this basis that the central bank run its printing presses continuously and blindly until inflation rise back to 2%—– supposedly thus reflating nominal GDP, aggregate demand, and the wheels of production and jobs growth in the real economy.

Thus Japan adopted “ZIRP” (Zero-interest-rate-policy) in 1999 and piled post-Keynesian central banking on top of an already hemorrhaging fiscal situation, leading to the explosion in the Bank of Japan’s balance sheet from about 10% of GDP to nearly 50% today. This resulted in massive financial repression, which not to put too fine a point on it, has been to no avail. During the approximate 15 years since it originally adopted ZIRP, Japan’s real GDP has limped along at 0.9% per year, not significantly different than the 0.7% rate it experienced in the previous post-1991 decade.

The obvious effect of ZIRP is the collapse of Japan’s previously vaunted household savings rate (which had funded its post-war capital expansion), now to below even US levels, something which will prove a trial for the large expected retirements looming up ahead, where even in the short-term Japan looks like it will quickly devour its savings. The country is on the road as David Stockman explains to “… becoming an international pauper”. The other unpleasant effect of ZIRP is that it seems to promise that government debts can continue to be financed at close to zero nominal carry cost for the indefinite future. Clearly any kind of “rate normalisation” is an impossibility, with the close to zero financing costs on Japan’s long-term bonds, since the sheer size of the debt has meant that the interest carry cost has still been consuming nearly one-third of its current revenues.

The attempt to exit this financial trap through the insane policies of “Abenomics”, trying to achieve a dare-devil “escape velocity” for the real economy have now shown to have totally failed. The spectre of inflation has indeed been created, but the real economy has collapsed even further. Despite the newly cheapened currency, and the consequent rise in imports, exports have hardly risen due to the policy of offshoring production to China, which in our “financialisation” environment has been  an integral part of the Japanese élite pandering to its corporate (keiretsu)constituencies, rather than seeking any kind of structural and social reform. There is no sense of national policy at all, a problem furthermore that we see across all “Western” economies anyway, where as Keynes said (see post below) “… enterprise becomes the bubble on a whirlpool of speculation… “ but clearly reflected in a much more serious situation in Japan, than in the rest of the “Western” economic system, thus representing the leading end of decline into the abyss. See:

http://wolfstreet.com/2014/07/24/the-flame-out-of-abenomics-in-one-crucial-chart/

 

Keynes on the unfolding financial crash

Current predictions of the doom of financial assets are too numerous to quote, and numerous enough for anyone to find at least ten on a cursory surfing of the internet.

The history of financial cycles is as long as history itself, but we are coming up against the conditions for – in capitalist historical terms – a major one with a terminal end. Cycles/crashes have been part of complex webs of economic movement since the end of the Napoleonic wars, but since the end of WWII we have an entirely new dynamic arising out of the ashes of a cataclysmic experience of “slash and burn”.

We are coming up against the conditions thus for a terminal end to the period since the crisis of the 1970s and the resolution which has defined the period to 2008 – one therefore which will demand major social change – because only if the US can turn the government budget situation round dramatically can it build up the fire power it needs to keep the system going in the face of its lack of “fiscal autonomy” caused by accumulated deficits and large foreign holdings by foreigners. A “crash” has in fact already taken place in stages between 1998 and 2008, and it is principally the Fed that has come to the rescue to prop up the system by offering the refinancing for what Minsky calls the “Ponzi units” in the financial system, not allowing these units to go bankrupt in what would otherwise be a natural course of events. To understand why “big government” is ironically essential for the survival of financial “markets”, and why “expert” monetary and financial management inevitably involves the kicking of the can down the road in the form the refinancing of “Ponzi units” read: H. Minsky, The financial instability hypothesis: a clarification, in The Risk of Economic Crisis, (ed.) Martin Feldstein, Chicago; University of Chicago Press (1991), pp. 158-166

Furthermore, the insistence on propping the system up is causing massive skewing in the real economy, which we will be paying for in any number of ways over the next fifty years, from the propulsion forward of loss-makers like Amazon that destroy healthy small businesses everywhere, to encouraging irrational energy extraction like fracking, with its continuous and growing deficits, both par excellence examples of “Ponzi units”.  Thus ultimately the success of “big government” in floating the system against all odds, itself begins to undermine its crucial “fiscal autonomy”. As Keynes said in the General Theory:

“… Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market. It is rare one is told, for an American to invest, as many Englishmen still do, “for income”; and he will not readily purchase an investment except in the hope of capital appreciation. This is another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator. Speculators do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation“.

See John Maynard Keynes, The General Theory of Employment, Interest and Money, Macmillan & Co (1936), p. 159 [emphasis added]

Japan has, par excellence, represented the economy which – coming most spectacularly out of the “slash and burn” of WWII – has, since the 1980s, ceased to function, with a government which has buried its head in the sand by trying to prop up an untenable system. It is at the leading edge of the “terminal end” of our current system, with the last hurrah of the sheer insanity and desperation of what has come to be called the Abenomics of Japan’s Prime Minister since 2012, Shinzō Abe. Look out for a future post on this subject.